The Quest for the Perfect Auction – Milgrom and Wilson’s Nobel Prize Winning Work
https://www.nobelprize.org/uploads/2020/09/popular-economicsciencesprize2020.pdf
Nowadays, auctions affect how we live and interact with others whether or not we notice it. Some people think of auctions in the classic sense of bidding for an item on eBay, but auctions can also affect other facets of our lives – such as how much we pay for electricity. This year, two economists were awarded the Nobel Prize in Economics for their efforts in improving our understanding of auctions – and even developing new auction formats – as we see auctions becoming increasingly prevalent and complicated. Paul Milgrom and Robert Wilson have written many papers on the topic in order to achieve this goal.
In the 60s and 70s, Robert Wilson outlined the best strategies for bidding in a first-price auction when the bidder doesn’t know the true value of items and produced analyses on the effects that possessing more/better knowledge has on bidders. According to his work, as the bidder obtains better and better knowledge, the problems associated with the winner’s curse (i.e. they win, but at a cost) worsen because “those who are at an information disadvantage will then bid even lower or completely abstain from participating in the auction,” so it would make sense for the bidder to know less knowledge. Paul Milgrom, on the other hand, wrote a paper in the 80s that analysed bids in auctions with private and common values – a problem that turned out to be harder than economists initially thought. By leveraging how well different auction formats dealt with the problem of the winner’s curse, Wilson was able to come to the generalization that as the strength of the link between the bids and the bidders’ private information increases, the revenue also increases, and thus the seller is incentivized to provide participants with as much information as possible about the object’s value before bidding.
By combining their work, the two were able to develop better auction formats for situations when existing auction formats couldn’t be used – such as in auctions for radio frequencies. Called Simultaneous Multiple Round Auction (SMRA), one of their main auction formats offers all available items at once, starting with low prices and allowing repeated bids in order to reduce the problems caused by uncertainty and the winner’s curse. This format in particular was important as it is now used by many countries in order to efficiently auction off radio frequencies to companies, while still benefitting taxpayers by making sure they get the best possible deal (i.e. companies wouldn’t need to charge a ton to cover how much they needed to pay for the frequency band). All in all, through what was actually just basic research, these two economists were able to develop the theory and practical applications that improved auctions for buyers, sellers, and consumers.
This links very well into what we’ve learned in class as we have been doing a lot of work on the topic of auctions. The main auctions that we learned about in class were English auctions, Dutch auctions, and variants of the two. However, they clearly have their flaws, especially in practical applications like those mentioned in the linked paper. We have learned about how it is not always the best response to bid your true value in some, while it does make sense in others, and now we can see a real-life example of this. Students can truly understand the fact that different auction methods have pros and cons in different situation and can more easily interpret when to use what kind of auction by learning about how these more ingenious auction forms resolve issues. Through their developments, Milgrom and Wilson have clarified some issues in basic auction theory while also inventing solutions to the issues. In the future, their work may change how we learn about auctions as students and may be the building blocks for other students to solve research problems surrounding auctions.